No Way Out of Default

WASHINGTON -- For months, persistent problems have plagued the Education Department’s debt management computer systems, which handle billions of dollars in defaulted student loans. For tens of thousands of borrowers, the glitches have become a roadblock to returning to good standing, rehabilitating their loans and becoming eligible for additional student aid.

In other cases, delays in issuing garnishment orders for tax refunds or wages have cost the government millions of dollars in lost recoveries.

The Education Department hoped to begin fixing the problems over the weekend, including rehabilitating borrowers in default who have successfully made payments on their loans. But the long delays have become a source of concern for many who work with student borrowers, who say the department has been promising a fix for months -- and in some cases years -- with no result.

“We’ve heard about problems with the switch to the server, problems with the contractor, but the problems drag on for months,” said Deanne Loonin, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, many of whose clients are in default on their loans. “I haven’t gotten a satisfactory answer.”

As well as problems with loan rehabilitation and and issuing wage garnishment orders, which have been shut down across the board since the Education Department began using a new loan servicing system in the fall, student aid officials say they have heard of other, less-widespread problems, including delays in enrolling in the government's income-based repayment program or in consolidating loans, both of which can stick borrowers with bills for higher monthly payments than they need to make.

Those problems are a setback for the income-based repayment system, which President Obama and others have touted as a way to provide relief to student borrowers amid growing concern about student loan debt.

The servicing problems come amid expanding responsibility for the department over federal student loans. Since 2009, when the government began originating 100 percent of federally guaranteed loans thorough its direct lending program, third-party corporations have continued to oversee the loans after they are made. But the huge growth in direct lending over the past three years -- more of the dollars of outstanding student loans now fall under the direct loan program, rather than the former bank-based Federal Family Education Loan program -- means that more of the servicing problems now fall on loans the government owns.

The department rolled out a new servicing website for direct loans in October, part an overhaul of its debt management system. Almost immediately afterward, complaints began rolling in: delays for borrowers trying to access the website or make payments, problems assigning defaulted loans to collection agencies, and issues assigning borrowers to income-based repayment, among others. A data breach revealed personal information for 5,000 borrowers.

Some of those problems have since been fixed, including refunds for overpayment and login glitches, according to department officials. But two big hurdles remain in the switch to a new default management system, donated at no charge by ACS, one of the department’s four outside servicers for federal student loans: rehabilitating and docking wages for borrowers in default.

Borrowers who are in default can “rehabilitate” their loans by making at least nine full payments over a 10-month period. After those payments, the loan will no longer show up as a default on credit reports, wage or tax refund garnishment ends, and the borrowers regain eligibility for several benefits -- including forbearance and deferment for the loans, as well as the possibility of receiving additional federal student aid in the future.

Since last fall, no borrowers who successfully made the nine payments have automatically had their loan status changed from in default to rehabilitated. The backlog has grown to more than 50,000 borrowers who are still considered in default despite having made the payments, according to internal reports the department sent to loan servicers. According to accounts on consumer review websites, some of those borrowers, frustrated, have stopped making payments on their loans entirely.

The Education Department has been dealing with the problems on a borrower-by-borrower basis, a department official said. Borrowers and representatives who have contacted the department directly have had their credit reports changed and regained eligibility. But the wider problem will require a full-scale fix to the debt management system.

Other problems have led to delays in collecting repayments on defaulted loans. No administrative wage garnishment orders have gone out since last fall, meaning that the federal government has missed out on repayments for millions of dollars in defaulted loans. And other delays in processing led to income tax refunds wrongly being issued to filers with defaulted loans who filed taxes early in 2012, although that glitch has since been fixed.

Most of that money will eventually be collected when wage garnishment begins again -- the department says the problem will be fixed by the end of the week. But for many borrowers, including some trying to reduce their monthly repayments through income-based or income-contingent plans as well as those currently in default, the delays have been an obstacle.

In some cases, borrowers have been entered into standard repayment plans -- with much higher monthly payments -- even though they qualified for income-based repayment, because paperwork was misplaced or delayed, said Karen McCarthy, policy analyst with the National Association of Student Financial Aid Administrators. In other cases, loans eligible for consolidation (and lower payments and interest) were unable to be consolidated.

Different servicers also calculate monthly payments differently for income-based plans, McCarthy said. In some cases, the methods can lead to hundreds of dollars of difference in repayment amounts. The association has asked the department to fix these problems for more than a year, but without a result, she said.

In other cases, Loonin said, students who request income-based repayment are instead put into income-contingent repayment, which can lead to higher monthly payments.

Congressional Republicans, many of whom opposed the switch to direct lending in 2009, have seized on the problems. In a March 27 letter to the Government Accountability Office, they requested the office look into the repayment and rehabilitation issues. "We are increasingly concerned the department may not be appropriately managing student debt," they said in the letter, which was signed by Representative John Kline, chairman of the House Committee on Education and the Workforce, and Senator Lamar Alexander, a former Education Secretary. 

"Bureaucratic problems within the department that are creating additional issues for borrowers could have serious implications not only for the Direct Loan program, but also for the financial stability of all student borrowers," they wrote.

Fixes for the wage garnishment and rehabilitation issues are a priority for the department, officials said. A fix was scheduled for over the weekend, but the department did not provide an update to Inside Higher Ed on whether it was successful. Officials have said in the past that they hope to have the system working at full capacity by May.